5 MOL! — The Miracle of Capitalism4 min read

The implications of what we discussed yesterday are profound for modern society. Most of you reading this will end up working in specialised jobs that take advantage of your unique talents. For your skills to add value to society, you don’t have to be the best1; you just need to have a comparative advantage.

Turns out comparative advantages can be developed. Like what we mentioned a few posts ago, the PPC is a description of a fixed point in time. Over time, through specialisation, you and I can become better at our jobs as we learn-by-doing. This creates greater comparative advantage. This is also why education and training are so valuable — they help people develop new comparative advantages or build on existing ones.

Division of Labour

Firms know this, which is why they hire people for specific roles. Firstly to tap on their existing comparative advantage, and secondly, to grow it over time. In Economics, this is called the division of labour. Division of labour allows firms to exploit individuals’ comparative advantages and maximise their total output. We have seen how specialisation allows the Tarzan-Jane economy to produce on their combined PPC; it is the exact same principle at work here.

But just like the Tarzan-Jane economy, there are some preconditions that need to be met:

Trade & Markets

We must be able to trade our services rendered or goods produced for money, which will then allow us to trade for other goods and services. It is the miracle of trade that puts food on our table and paper rolls in our toilets while we slog away at our 9-5 office jobs. If we couldn’t trade with one another easily we would all have to be farmers and grow our own food to survive.

So what makes this kind of trade possible? Markets — or more specifically, well-functioning markets. The bulk of your JC1 year will be spent on studying how markets work, and how they might fail — so stay tuned.

Preferences & Wants

Your services or goods have to be wanted. Just like in the Tarzan-Jane economy we needed balanced preferences when there were only two goods, in the real world we would need some people to demand the good or service you are comparatively better at.

Luckily this is not very hard in today’s world. People’s preferences are diverse enough to begin with, and given how the world is becoming more affluent, and how markets are becoming larger through globalisation and the internet, it is becoming increasingly easy to find someone who will be interested to buy what you are comparatively better at producing.

So the fact that you can even consider making a living out of your ‘dream or passion’ is really all thanks to economics and capitalism. For most of you, that option would not have been available if you were instead alive 200 years ago.

Cherish it.

In summary, the economic concepts of comparative advantage and specialisation have profound implications for society. Modern economies thrive on division of labour. Without trade and markets to facilitate trade, we would all be planting crops in the field now.

Question of the Day

What are the two economic reasons to justify the division of labour?

The answer to yesterday’s question is b — One person is better at producing everything.

Further Questions

  1. How might you argue against the division of labour?

  2. “Stats are sexy. Deal with it. The sexiest jobs in the Internet Century will involve statistics, and not just in a parallel geeky fantasy world. Hal Varian notes that it is always a good idea for individuals to build expertise in areas that complement things that are getting cheap, and data, along with computing power to crunch it, is definitely getting cheap. We are in the era of big data, and big data needs statisticians to make sense of it. The democratisation of data means that those who can analyse it well will win. Data is the sword of the twenty-first century, those who wield it well, the samurai. So start sharpening that blade, uruwashii, and take statistics.”

Eric Schmidt, How Google Works

Explain intuitively what Hal Varian means by his statement and how does it relate to comparative advantage?

3. How else might one decide which areas to develop comparative advantage in? Does the same decision making process apply to governments and entire economies?

  1. Comment.

We look forward to seeing your responses in the comments section below!

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Till next time, dream economics.

 Stay patient and trust your journey

  1. Being able to produce more of one good or service is also called having an absolute advantage. 
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